Fall has arrived and it's the perfect time to do some business financial planning. At this time of year, we're concerned with multiple things...finishing the year, taxes, and getting a jump start on the plan for next year. It can all become overwhelming pretty quickly. To keep you on track, I've put together a 4 part process.
I. How has the year been going?
Before you can determine what you need to do in the 4th quarter and beyond, you have to know where you're coming from. If you don't have up to date financial reports, get them done NOW. The end of the year will be here before you know it. Generally speaking, surprises at tax time are not good surprises. This is also the first step to ending the year in a good place and planning for next year. Once you have your financial reports:
->Take a look at your profit and loss by month.
This will help you see if anything is missing, particularly monthly or quarterly recurring payments. It's also a good way to find categorization errors.
->Review your budget/forecast/projections versus actual reports.
Are you where you planned to be at this point in the year? Are your sales on track with your forecasts? Are your cost of sales and expense in line with your plan? If not, why not?
->Review your financial ratios.
Are your key ratios in line with your goals? Are you hitting your gross margin target? Is your net profit where it needs to be? Is your days sales outstanding looking good? How is your debt to equity?
II. What do you need to do to finish the year strong?
Now that you can see where you've been this year, you can make a plan for the rest of the year.
Based on your year so far, historical numbers, and marketing plan, what revenue goals are achievable for the rest of the year? If you haven't been doing well this year and you really need to bring your A game to 4th quarter, what are you going to do differently? In your review process, you should have pondered why your year hasn't gone according to plan. Use that information to inform your plans for the 4th quarter. If you have been meeting your targets so far this year, review what is working for you and what you need to do to maintain the momentum.
With your year to date information and your revenue plan for the 4th quarter, what changes need to be made to your spending plan? Will you need increase labor spending to meet your 4th quarter goals? Do you need to reduce labor costs to get your financial ratios where they need to be? Have you been spending your marketing dollars on things that aren't working? Do you need to spend more on sales and marketing efforts that are working?
If your business is like most businesses in the b2b service arena, the first quarter is known for clients paying slowly. To keep your company running smoothly in the first quarter, you must collect aggressively in the 4th quarter. Be vigilant about getting deposits on your fourth quarter work and get December invoices out as early as possible. Ensure your accounts receivable team is staying on top of collections and do your best to get everything possible collected before everyone heads out for the holidays.
->Keep An Eye On Cash Flow
The first quarter collections slow down means you'll have to be extra careful with your cash flow. Make sure you're maintaining an adequate cash reserve to handle your critical bills and payroll during the first couple months of the new year. If your historical trends show first quarter to be normal or strong for cash collections, you may want to pay forward some of your debt in 2010 to get the tax deduction this year (assuming you're a cash basis payor). Also make sure you adjust your cash flow forecast to coincide with any revenue or spending adjustments.
III. What are the tax impacts?
Once you have accurate financial reports through the end of September and projections for the rest of 2010, get an appointment to see your tax preparer (or at least send them your QuickBooks file and projections). The sooner the better. Your preparer will be able to give you an estimate of how much you'll owe, instructions for estimated payments you need to make to avoid penalties, and tips for reducing your tax bill. After December 31st, it will be too late to strategize for savings.
IV. What about next year?
After you've gone through the process for the 4th quarter, you can extend the process for next year.
Base your sales forecast on historical figures. Estimate a percentage of increase in historical sales and make adjustments for one time windfalls. Add estimates for additional sales channels or products.
->Create a Budget
Use your sales forecast and historical spending to inform your projected profit and loss by month for the upcoming year. Make adjustments for new employees, equipment, and any other known changes that are needed to achieve your goals.
->Develop a Cash Forecast
Use your budget to inform your extended cash flow forecast. Make adjustments for when you expect revenue to hit your bank account and when your expenses will actually be paid. If the ending bank balance goes negative, you may have to adjust your budget.
Once you've completed this process, you'll have a strong business financial plan in place. Regularly reviewing your plans with your actual results will ensure you have the information you need to make smart decisions.
Copyright (c) 2010 Kelly Totten